Water Problems & Solutions

Whiskey's for Drinkin', Water's for Investing

**Editor's Note: Be sure to read Energy and Capital's up-to-date resource page on water investments.

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Given the current state of their region, you'd think the Western Governor's Association would have plenty of pressing issues to discuss. . .

California can't pay its bills—funding for education, healthcare and welfare have already been cut as the state's deficit continues to balloon to over $24 billion. In all reality, state-paid workers could soon be paid with IOUs.

The source of swine flu, now a global pandemic per the World Health Organization, lies right below Western states. And then there's the ongoing immigration and drug problems stemming from their southerly neighbor.

Indeed, Western governors have much to worry about and prepare for. Yet conversation at the recent three-day Western Governor's Association meeting was largely dominated by water issues. The topic is gaining such importance that several presidential cabinet members, as well as water experts from the Middle East and Australia, were in attendance.

According to the Associated Press, "Although many of the controversies in the West center around urbanization, natural resources and energy development, water - and often the lack of it - comes up again and again."

Alleviating water issues in the West and elsewhere is proving to be a very valuable, multifaceted business. And the gathering of minds at the recent governor's summit offered a bit of insight about where to look for profits.

Tributaries of Water Profits

One of the key panelists at the forum was preeminent water expert Dr. Peter H. Gleick, president and co-founder of the Pacific Institute, and someone whose work I've been following for some time.

With respect to "urbanization, natural resources and energy development," Gleick believes, "Water is connected to all those things." This is a theme I've conveyed to you in articles about the energy-water nexus.

To combat the compounding of problems, Gleick and policymakers are pushing numerous solutions that focus on both the supply and demand sides of the water issue. And each one has its own investment angle.

On the demand side, officials are pushing ubiquitous conservation. And this means water prices are going to rise.

Los Angeles has already given customers a monthly usage allowance. If they go over, their water rate nearly doubles. And the European Union's Water Framework Directive will heavily tax water after 2010.

Just as consumers are adapting to higher energy costs, so to will they adapt to higher water costs. Smart meters being used for electricity are being engineered to work for the water industry as well.

Retrofitting millions of homes and businesses with smart water meters will be big business. And some of the same names apply. IBM (NYSE: IBM) and Itron (NADAQ: ITRI) are involved in all things "smart."

But reducing demand is less than half the picture in this scenario. The big solutions—and the big profits—will come from altering water supply.

Oceans of Water Profits

Pretend for a moment that water is oil.

Conservation is great. But it doesn't really change the macro market. Tightening water use standards is like increasing CAFE standards: it makes headlines, but that's about it. It's a purely political victory—no automaker was doing cartwheels over having to make more efficient cars.

Now imagine changing the supply picture.

This is why throngs of investors get so excited about offshore oil, oil sands, and the arctic reserves. . . because it increases supply. And the companies that have access to the new supply can earn a great deal of money.

The entire business of wildcatting was built on this premise.

And it's about to play out in the water sector on two fronts.

The first is water reuse. By actively treating and reusing water, rather than purging it into rivers and down storm drains, the supply picture begins to improve.

As water problems mount, a multi-billion dollar effort will ensue to revamp our water infrastructure, erecting many new treatment and distribution plants. Much money was dedicated to this in the stimulus, and related stocks are starting to feel the results.

Industrial water plays like Tetra Tech (NASDAQ: TTEK) and Flowserve (NYSE: FLS) are the main beneficiaries. Not to mention all the parts and pump suppliers that will provide the backbone for the expansion.

The second, and most lucrative, supply-side solution is desalination. If it were oil, desalination would be like finding limitless Saudi Arabias in your backyard. There's an infinite supply. . . oceans of water and oceans of profits.

It's why blue chip conglomerates are pursuing the technology full bore. GE and Dow have been in the desalination game for years. So has Siemens. They've been exploiting desalination in the Middle East where oil money and arid conditions have allowed it to prosper. But growing water issues are about to make desalination a global necessity.

A recent industry report by Lux Research stated the industry will triple in the next decade. Related stocks could fare just as well.

If fact, I've found one company whose technology is certain to succeed. Berkshire Hathaway and a handful of institutions agree with me—they've each bough millions of shares.

You can learn all about the technology, the company, and its profit potential right here.

Call it like you see it,

Nick

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